After Years of Warning Folks To Avoid Labor Theories of Value Many Conservatives Conflate Labor and Value

I should give this better treatment than I am about to but the basic point needs to be addressed.

From Steve Moore to Russ Roberts to Kevin Williamson one of the basic lines of arguments that you hear from conservative econ folks is about how stimulus/government/socialism is bad at creating value. Therefore they seem to reason, none of those things could be a solution to the Great Recession.

The thing is that the Great Recession is problematic not because we aren’t creating value but because we don’t have enough jobs. I know. I spend all semester saying we work to live, we don’t live to work. However, you have to hear me out on this.

Compare for example the depths of the Great Recession with peak of the 1990s in terms of GDP per capita.

You can see that even at the worst of the worst, using an updated data set that shows how truly awful the Great Recession was, we were still wealthier than we ever were during the 90s. That is, there we were making more per person in America than ever during the boom years.

Compared to the 90s that everyone loved, we were a value creating machine.

Ok you might say, but we were living high on the hog then. Now everyone has to cut back out of fear of being laid off. That’s the real pain. Is it? We can’t actually live as well as we did back then.

OK, so lets compare Personal Consumption per Person (this includes the unemployed remember) now versus then

Not even close. Now blows then away. We are consuming way more per person now than in the go-go 90s.

But wait. Tyler Cowen regularly reminds us that we are not as rich as we thought we were. That’s what the Great Recession was all about after all – that sudden realization. Well, lets look at net household assets. This data captures the massive run-up debt during the 90s as a negative, as well as the collapse in the housing and stock markets as negatives.

Now we come close but still no cigar. Even at the depths of the recession, with our mortgage debt sky high, our housing values in the toilet and our 401(k)s ruined, we were wealthier per person than at the height of the dot-com boom.

Yet, there is one measure that doesn’t even come close to matching that during the 1990s and that’s employment per capita.

Now that looks bad, bad, bad. Much below that 90s peak. If that’s the stat that matters then its easy to see why the 90s were freaking awesome and now just blows.

But that stat isn’t production, it isn’t consumption, it isn’t wealth. Its jobs.

The reason this time is so painful is because there is a dearth of jobs, not value. Why people care so much about jobs is a complex story. But the important point for now is that jobs are the issue, not the creation of value.

Lack of jobs is why everyone feels bad, not because they have less or are poorer or the country isn’t producing or consuming as much. And, not to get to meta – in what I hope is an easily readable post – but an economy that makes lots of people feel bad is by definition a bad economy.

Moreover, the feeling that you have now about the economy is not the feeling of lack of value creation. Its not the feeling of socialism.

I wish I had more time to go into this because “what socialism feels like” is an important concept. However, my more conservative readers will may readily get the following example.

Have you ever been pissed off at the fact that your neighborhood school doesn’t teach any of the stuff you want and it feels like your kid is just wasting her valuable time going to all of these pointless classes for no reason. THAT, is what socialism feels like. That is what the lack of value creation feels like.

Its not that you are afraid of losing what you have or that budget constraints are pinching. Its that the stuff which is available to you sucks. It – in extreme cases – is a world where everyone has a job but where no grocery store has fresh milk. It’s a world where everyone gets a pay check but no one can find shoes that fit.

That is what socialism feels like. That is what government getting in the way of the market feels like. In many ways it’s the exact opposite of the way this feels.

Because you know I can’t resist: When you are waiting in your doctor’s office and she is 50mins late and proceeds to be rude to you and not give you “permission” to go buy the drug that you are dying to buy because its finally been “approved.” That’s what socialism feels like.

And, it has nothing to do with whose paying for your insurance and everything to do with the fact that you will go to jail – that place with bars and guards – if you refuse to follow the proper protocols for obtaining drugs.

That’s what failure to create value feels like.

The Great Recession: that’s a problem with jobs, with labor. And, its very different in kind. When we think about what’s going wrong here and how to fix it, we have to keep that squarely in mind.

55 comments

I partially agree with you. However, I also believe that another part of what makes the economy “feel” bad is that we are now aware that there are also private interests that are powerful enough to be able to interfere in the economy and help create socialist-type outcomes along. The notion that banks cannot be trusted to write an honest prospectus (or tell you if they are shorting the same securities they are selling you), while at the same time government cannot be trusted to regulate banks, while at the same time the judicial system cannot be trusted to punish wrongdoings after the fact, is truly depressing.

I think much more so than in the 1990s many people would agree with the sentiment that “none of the powerful interests in the country – public, private, or otherwise – has my best interests at heart.”

Agreed!!! I was gonna write something like this, but, not being an economist, I didn’t know how to use the word “aggregates.”
The article also makes the mistake of counting the bogus inflation in housing prices as “net household assets.” Economists don’t understand this, but I don’t care what my house is worth. I already own it, I don’t want to borrow against it, and I’m not going to sell it and go be homeless.
The author’s comments about “what socialism feels like” and “what failure to create vaule feels like” are cyrptic. I don’t understand his point.
Congratulations to all the posters for excellent comments!

What if it’s a problem with median consumption and median household wealth, rather than average? That would dovetail with a lack of jobs and the outsize impact of 401k/home equity losses on the bottom 90% of the nation.

According to Emmanuel Saez’s work on income distribution, the average real income of the bottom 90% of earners in the US declined 10% from its peak in 2000 to 2008 (the latest available data). And it’s possibly more skewed down the curve; the bottom 50% could’ve seen greater declines.

You’d need similarly segmented household wealth data to complete the analysis (which I can’t find), but if the bottom 90% of Americans have seen material decreases in real earning power and wealth since 2000, that could bely your analysis above and suggest that earnings/wealth actually are a problem causing the Great Recession.

Great post. All I have to say is “Amen” because I’ve been trying to tell my conservative friends the same thing, but I could never quite sum up the point so effectively.

To foosion, I have to say, that yes you are right, except that disaggregating the data makes the point more strongly, not less. When the economy is in recession, the bargaining power of the haves becomes greater and the bargaining power of the have-nots becomes less, tending to skew the problem more than during good times. But nobody is “doing well”, and this is because the haves benefit from the robust jobs environment as well as the have-nots… this is why they offer jobs and why their bargaining position erodes during good times.

On top of that, always remember that the median worker HAS A JOB. Even during the depths of the Great Depression this was true. They are not falling behind nearly so much as you seem to assume. I will concede however, that the median worker isn’t doing much better than the dot-com boom. They’re not doing worse though, either, which is my point.

As another commenter has mentioned, this post falls into the common pitfall of missing nuance by staring at averages.

Employment probably reflects the distribution of wealth far better than average or even median income. When lots of people are out of work, there are a lot of people with no income and a lot of other people with no bargaining power versus their employers. Thus, it’s quite likely that there are more people today than at the end of the 90’s who are in really bad financial shape, even if there are other people who are in better financial shape. If Al has his house foreclosed on and Bob buys a new Maserati, aggregate welfare likely falls – losing one’s home is far more bad than gaining a luxury car is good.

There is also the questionably-rational human element of anchoring. It’s one thing if everyone is getting poorer. It’s another if you’re getting poorer and people you think are undeserving are getting rich. It’s not simply unfortunate, it’s manifestly unfair. I doubt many people would have a problem understanding why this is so bothersome. Imagine working somewhere, surrounded by incompetents who were paid far better than you and not-so-subtly rubbed it in your face; how much of a pay cut would you take to work somewhere where that situation didn’t happen?

In addition to my above post, Greg Mankiw noted during the original Saez-Reynolds kerfuffle that consumption inequality has not changed markedly over the past 20 years — i.e. the real rate of consumption has grown evenly across all quintiles, about 14% from 1985 to 2005. [1,2]

However, the Saez/Piketty data [3] show that real income grew 65% for the top decile from 1985 to 2005, while for the bottom 90% it grew only 6% (from Table A6; you can do the math).

This shows the bottom 90% getting squeezed on income/consumption basis. And again I don’t have the numbers, but the trend suggests that the bottom 50% are getting squeezed worse than the bottom 90%.

These data suggest that the median American is in fact doing worse on a real income and real purchasing power basis.

We don’t need a degree in statistics or economics to know that we’re getting screwed. Problem is the rich expect us to put dinner on OUR credit card.
The bigger problem is that many of us are stupid enough to keep electing the whores who are in bed with the financial industry.

It is with great schadenfreude that I ponder how those poor socialist shlubs in Norway, Sweden and Denmark can’t get their hands on the food they want, the medications they need, or even decent shoes, while their disadvantaged children wallow in the state-induced ignorance of their failed educational systems.

Scandinavian countries are more concerned with wealth distribution than with social ownership of the factors of production. Distributionism is different from Socialism. Socialism = Cuba and many south american countries, whereas most modern democracies are to some degree distributionist, some more than others. You might be surprised to find out that Milton Friedman was one of the greatest advocates of distributionism (see Negative Income Tax)

Great post, although it needs to be sharpened up a bit. I’ve love to see you do that. It really does seem to be a meta issue. That needs much more discussion and analysis. I’m waiting for your next chapter.

Something is missing here, and I think that the growing rich/poor income disparity is not sufficiently recognized. If Bill Gates or Warren Buffet were to walk into the local bar with 98 people, the average wealth of the 100 in the bar would improve enormously even though it would not actually rise at all for the original 98. In the short term the loss of jobs helps the wealthy and corporations enormously because they can hire overqualified people for less, reduce benefits, postpone raises, ignore working conditions — all of which place greater burdens on laborers. We suspect that such policies will eventually hurt the corporations, but in a global economy, corporations and the wealthy have mobility, tax advantages, labor advantages, and political advantages not available to the laborers or even to middle management. As one example, in the above bar, if Bill Gates were to buy everyone a drink for $1 each, he writes it off as a deductible expense saving, in a rare case, 25%, so he actually spends $.75. If the “average” individual in the bar buys that same round for $1.00 each with his after tax income, he must actually earn $1.30 to have that dollar to spend. Big difference of $.55 for the same generous gesture. That’s among the advantages that the wealthy and corporations have over us peons. As for the interest on the mortgage of my inflated value home — that’s money that’s now going to the lenders, and inflated taxes on the same property are now going to the city and state, and my income and benefits have declined, again to the advantage of the corporation. I think we need another kind of analysis that truly shows where the bottom 90% stand.

If the problem is one of jobs, that would seem to indicate an issue with expected (planned) future consumption. Leaving aside the aggregation question posed by other commenters, if we are “wealthier” now, we could dip into that store of wealth and maintain our standard of living even in the absence of (or reduction in) current income. However, we would then need to reduce our planned future consumption, since that was what we were ostensibly accumulating the wealth for in the first place. Also, there may be regulatory obstacles to tapping into the accrued wealth — how much of it is in retirement vehicles and not accessible without substantial penalties?

Whereas, under our glorious, predatory Capitalist system, they pretend to pay us, and we go into further debt to consume.
Then, they re-package and sell our debt as a commodity at an inflated price and call it “wealth creation.”

Look at median household or median family income and you can see the 1990s were almost the same as the 2000s in terms of typical family income. Real GDP per capita is skewed badly by distributional gains to the richest among us, as many of the earlier commenters have remarked.

One thing I didn’t see noted here: What about all the jobs that have been “outsourced”? I’ve spent 15 years in the Tech/Customer Service field, and for the last 6 worked in the “Tier3″ (save the customer dept.) I’ve noticed that most customers are sick, furious, when they call an 800 number for help and the person at the other end can’t speak English. Then there is Illegal Immigration, where no taxes are paid, under the table, our Government gets nothing- the money is sent back to…
There are so many reasons we don’t have enough (safe and decent paying) jobs to go around. Graphs don’t say what’s right in front of us: too many layers of Government.

I have a slightly different view of why people ‘feel’ miserable. Being a socialist, I see it quite clearly.
People see on paper that they haven’t got what they thought they had. It was on paper in the first place.
On the other hand, the wealthy are seen to have ‘cashed in’ on the bank and business practices which went unregulated because our government decided to engage in an honor code with the enforcers swapping roles regularly with the bankers and industrialists they were ‘supervising’. That ‘felt’ like free market but it was in fact anything but. It was contrivance and once it was seen by people with leverage (money) to be available for exploiting, those persons quickly put aside their roles in the honor code because they knew they wouldn’t be any worse off it they were ever held accountable. (Someone else, ie: stockholders paid the bill; no one did any ‘time’.)

Those of us who were betting on a piece of the action in this contrivance were not in control but were riding on the coat-tails of those with real money and real power. Many people didn’t ever consider or know what was going on but felt like they needed to buy, or sell, because of what ‘appeared’ to be happening around us. That buying because we were overly optimistic, felt like a good gamble but it also fell apart. Lot’s of us felt like it was the government’s sudden job to have stopped the contrivance after the party crashed; not hand money to the people who were driving. That felt bitter to many people who were feeling and experiencing huge losses. Our government did not tell truthfully how bad things were, in part because it would have driven down the optimism needed to recover; and in part because they were naive about how bad it was going to get.

It would have felt good to me that the government took a piece of everything that it bailed, from AIG to BoA and put regulators on those boards to stop the contrivances and downgrade those assets sooner rather than later. Then when bonuses from the other ongoing contrivances, like mortgage foreclosures fraud got out of hand, the socialist hand would have reached in and put people into jail and made the money be given back. That would have felt good to most Americans; and that would have been socialistic and rightly the thing to do. Those things would have made sense to most Americans and restored confidence.

However, what happened was a great many people in Congress figured that they would do better by staying on the side of those with power and the reins of money. They decided to call the ‘socialist’ card before it could be played. The bankers and high-rollers of the crash were able to spend freely against the prospect of government regulation of their ability to continue to do what they had done and were renewing. Meanwhile we were all distracted from the economy by the sideshow on healthcare. And that’s why the White House put it on.

With all the angst people had about their paper losses, the ongoing foreclosures, the mood was ripe to have people express the raw feelings which they were not in touch with. To many, it felt like socialism was a good description of the government handing money to banks. With the astro-turf help of the people who drive the more sinister aspects of this economy, the preceding mock cry of socialism became the meme about health care reform, which is the chief driving mechanism of costs in this country.

To those who have always been suspicious and view government as the problem it felt good to scream about government overreach when the truth is that the government way under-responded to the crisis and did nothing about the root causes. Instead it went busily about the sideshow and was co-opted in that sideshow by another one.

Coupled with the dawning realization that there is more dreaming in the American Dream than reality, we have now been confronted with the staggering pragmatism of the two wars social and economic costs. Neither was has been ‘won’ as we were led to believe. And that feels like our flag waving has been betrayed by people NOW in control. All we are left with is the bill, the wounded and the prospect of deficits for years into the future. We are not the people of trust in our government and general gullibility we were just ten years ago. Someone MUST be held accountable for the way we feel!

There are people experiencing real pain in this country. But by far, the greater loss in our hearts is the feeling of losing the advantage and ‘sense’ of fulfillment that went along with having jobs, security and believing in a whole milieu of dreams which was not sustainable. If someone has to be held accountable for that loss of ‘good feelings’, it has to be the guy who promised HOPE and CHANGE. Having everybody in the same pot, feeling crappy about our prospects, well, it ‘feels’ like we are a socialist nation because that is what we are told socialist countries feel like. Of course that is bunk. Socialist nations feel like their future is in good hands, that things will be returning to normal and that we can still live and breath and together get through each day.

What we miss is our optimism. And that is not returning for a very long time. Therefore it IS time to turn this country hard left and employ far more socialism in governance for the good of people and society. When people are explained the benefits of programs which assist them, they support those programs. When they see the costs of industry and development in their true costs they make choices. Sadly, our society doesn’t want to require such disclosure. Instead we are confronted with another cheap form of denial and mysticism in the form of religious guidance offered by extremists as their ‘answer’ for what we ‘feel’ we have lost.

I’m betting the ranch that most Americans are going to buy into that investment big time.

You are saying that big business was poorly regulated because the enforcers cannot be trusted. So as a socialist, what is your solution to such corruption? More regulations? More enforcers, with greater powers, who also cannot be trusted? Regulatory capture is a fundamental part of the whole corporatist system. To quote P J O’Rourke, “When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.”

I agree with your statement of the problem, BTW, but I have not seen you offer a viable fix.

Every socialist system ever tried on Earth has descended into some form of black economy based on the exchange of favours (blat, guanxi, nepotism, cronyism, etc) which is nothing more than the re-emergence of a marketplace (by stealth) and inevitably results in corruption of the system. A corrupt system of this nature can run for a long time, but will never be efficient.

Australia is democratic socialist, mild socialism, and it works just fine-nothing like your article’s description at all. sorry. Your ideas about socialism, on the ground, in Australia, are completely wrong. And Its working a whole lot better than America’s “system”, thanks! Everyone has help and a chance here in Oz-not the case in the USA!
Jobs are key–Oz has a very serious deeply backed up jobs/education program that works through all sectors of society-which is non-existant in the USA. Also, we have free or at least low cost medical service to help everyone. The govt supported system works radically better on the ground compared to the private sector, much better, far less expensive, and more productive to society-and medical staff are all well paid.
Socialism in Oz means people are looked after, educated, and employed productively, not sent homeless or put in prison to such a high level as the the USA instead!
The USA, from Australia, looks like a Corporate Police State also mind f—ed by Religion, and no serious idea how to look after people and jobs at all. Visit Oz for awhile and learn how to go better-it would help 300,000,000 Americans-and the world-if you actually care. Get a grip. Get out and see the real world.

If you want to know everything about socialism in Australia, just do some searching on “Craig Thomson” and check out his career path.

With regard to medicine, as someone who lives in Australia I can tell you that our system sort of works, if you break your leg and go to hospital they will fix you up OK and it won’t cost much. On the other hand let me provide a specific example of how it doesn’t work.

Gallstones are a problem that is on the rise all over the Western world, and it’s a problem I’m familiar with on a personal and painful basis. The gallstones are basically a symptom of sluggish bile flow, almost certainly related to diet and lifestyle, another symptom is poor digestion — not life threatening but annoying. The “official” solution is to have your gall bladder removed, which sort of hides the problem, but doesn’t actually do anything to improve bile flow. This operation is very popular and makes a lot of money for the surgeons.

There are heaps of suggestions of alternative diet and lifestyle that might help, I’ve tried a few of them, haven’t noticed any improvement. No one is doing real research into this because [1] lifestyle research requires large sample sizes and long time spans, [2] they already have a solution and it makes money, [3] if a small change in diet could fix the problem, there would be no profit in that. You would think this is exactly the sort of problem where a socialist approach would enable government to bypass the profit motive and improve quality of life for all citizens…

What I discovered was that people in other countries take
ursodeoxycholic acid, to improve bile flow and it helps. In Australia this is a controlled substance (despite being completely harmless and not in the least psychoactive) and only approved for use in cases of very bad liver disease (fortunately I’m not in that category). You used to be able to buy tauro-ursodeoxycholic acid which could be imported by a loophole (and I found it very helpful and could feel an immediate improvement of my whole digestive system within days. They seem to have closed the loophole because the health food shops that used to sell this don’t anymore. I am perfectly happy to pay for either product but what I’m told is that I’m not allowed to have any.

Why would such a stupid situation happen? Well, ursodeoxycholic acid is not cheap, and if it were available and there was a perception that it was helpful for a common problem, suddenly everyone would demand the government put it on the “Pharmaceutical Benefits Scheme” list so it gets paid out of tax money. If there’s one thing that Australians don’t tolerate it’s the idea that one person gets something, but others can’t also get it… so what happens is no one gets any. Crap, but equal.

To be fair, the doctors I’ve talked to were not even remotely rude about it, most of them were somewhat sympathetic. Doctors love to help you buy drugs in Australia, because they get free tickets to the opera paid for by the drug companies. Doctors are basically sales agents for the drug companies. However, the rules are strict.

Another thing that happens in Australia became evident to me when I had a scan done (unrelated matter) and I checked out their price list. The same scan costs one price if you get it done under the government Medicare, and about double the price if you get it done under your employer’s compulsory health insurance (known as “Worker’s Comp”). So what is happening here is that the employers are getting rorted and forced to subsidize public health. All part of the social wage brought to use by Bob Hawke.

I agree we have a jobs problem, but it’s not a general jobs problem. If you have a college degree (and more workers than ever have one), the unemployment rate is 5%. Much higher than in say 2005 but it’s still not much suffering. The suffering is among the less educated who have been building houses no one wants to buy or who have been on an assembly line that doing a job that is now being done by a machine or a cheaper foreign worker.

If you look at the $820 billion spent “stimulating,” how is that money supposed to help those workers?

Spending by itself, does not create value. Why do you think it will create jobs? So how do you create jobs if you’re not creating value? If there’s no value, it’s just welfare under a different name. That helps the unemployed, but don’t call it job creation.

I feel so much better now. Tell me, do they include unpaid interns as “employed”? Do they include “independent subcontractors” as employees? The IRS certainly doesn’t.

This doesn’t explain why, after three years, my computer system engineer brother is still out of work.
It certainly doesn’t explain a job market which doesn’t care one whit about my college education, unless I want to work for free.
Even acing their pre-employment tests is more likely to amaze than to impress potential employers.

The only sort of government intervention which will relieve the employment/wage situation is tax policy.
I propose tax breaks based upon hiring and the wages paid to non-exempt employees. Omit any compensation to management, to avoid companies gaming the system by “increasing” average wages by simply giving the CEO another million.

The “stimulus”, as it exists only serves to reward business as usual. “Oh my, the pig trough is empty. Throw in some more slop or the hogs will die.”

OK, AVERAGE production, consumption, and wealth are up. But as I heard one person put it, if Bill Gates walks into a bar the customers’ average wealth goes up by millions. All these things can be true, but what is indicated on the employment per capita points out what is glaringly missing: a graph of the the percentage of total wealth held by the wealthiest 0.1%, 1%, 5%, 10%, 25% and 50%. I’ve been hearing so many stories of runaway profits for the upper crust who may well be consuming plenty of luxuries with their phenomenal bonuses, but I think there are many like me who, after a year of four-day weeks and another of three-day weeks, are getting back to full time with a run-up credit card debt and just in time for some automotive repair to become necessary, and it seems like austerity still stares one in the face to even try to whittle the debt back down.

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